Dean Ast, in His Capacity as Executor of the Estate of Harold Ast, Deceased v. Her Majesty the Queen, [1992] 2 CTC 2251, 92 DTC 1898

Kempo, T.C.J.:—This is an appeal against an assessment for tax issued by the respondent acting through the Minister of National Revenue in respect of the taxation year 1989. The appellant claims entitlement to a greater capital gains exemption on the sale of qualified small business corporation shares than was allowed by the Minister. The Minister allowed $1. The appellant claims the allowable exemption for the year should be $66,582.11. The matter turns essentially on subsection 110.6(2.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

By way of background, Mr. Dean Ast is a pharmacist and is the son of Mr. Harold Ast who was deceased on October 15, 1989. Harold Ast was a pharmacist who operated, for some thirty years, a drug store business called Hill Avenue Drugs Ltd. Dean Ast clerked in the store while he was growing up and then was employed as a licensed pharmacist after 1983 upon gaining the necessary professional qualifications.

Due to Harold Ast's illness and the consequential probability that he would not be able to run the store for too much longer, informal discussions commenced around 1984 or 1985 concerning the possibilities of the sale of the business to Dean Ast. Dean Ast said he was interested in securing his future in this business. The matter was also discussed from time to time with Mr. Gordon Dillon, a certified general accountant, who was then the accounting adviser to the business. Because it was a family situation, the matter was merely canvassed by way of general discussions for some two to three years.

During June of 1987 a White Paper proposed for tax reform was released (this document was not put into evidence) which purportedly would substantially increase the allowable capital gains exemption with respect to the disposition of qualified small business corporation shares. The Messrs. Ast, with the advice of Mr. Dillon, entered into a share purchase agreement, found in tab A of the Book of Documents, Exhibit A-1. The agreement, dated September 23, 1987, establishes that at that date Harold Ast sold all of his shares in Hill Avenue Drugs Ltd. to Dean Ast for $110,000 which amount, according to the evidence, was paid in full on that date.

It was Mr. Dillon's evidence that he believed the pertinent White Paper proposals were non-contentious in nature and that, given his experience in tax matters, they would be legislatively enacted in due course. He had prepared the 1987 tax return of Harold Ast in the spring of 1988 on the basis of the allowable capital property deduction amount as it then stood with the express intention of taking advantage of the enriched allowable amount once the legislative amendments came through. This he attempted to do for the 1989 year in conjunction with the gains which arose on the deemed disposition of capital property immediately before the death of Harold Ast. No capital gains exemptions were triggered in the 1988 taxation year.

The basic and substantive facts of this case are essentially uncontested. Save for one qualification as hereafter noted, they are in the main as reflected in the appellant's filed law brief under the heading “facts”, thusly:

1. The relevant facts may be taken from the Agreed Statement of Facts or the viva voce evidence and exhibits introduced at trial. The basic facts are these:

(a) On September 27, 1987 Harold Ast sold 10 Class "A" shares in Hill Avenue Drugs Ltd. to his son, Dean Ast, for the sum of $110,000.

(b) The taxable capital gain of Harold Ast in respect of the sale of his Class "A" shares was $54,995 calculated as follows: $110,000 (proceeds of disposition) — $10 (adjusted cost base) = $109,990 (capital gain) x 1/2 = $54,995 (taxable capital gain). Harold Ast claimed a capital gains deduction in the amount of $49,936.33 pursuant to s. 110.6(3) of the Income Tax Act, R.S.C. 1952, c. 148 as amended. By claiming this deduction Harold Ast effectively eliminated the eligible Capital Gain Deduction From Other Property that was available to him under the Act in 1987. Harold Ast was required by s. 110.6(6) to report his capital gains for the 1987 taxation year.

(c) On September 13, 1988 Parliament proclaimed in force S.C. 1988, c. 55 which brought into force s. 110.6(2.1) of the Act. Section 110.6(2.1) allowed a special capital gains deduction in respect of qualified small business corporation shares disposed of “in the year or a preceding taxation year and after June 17, 1987”. Section 81(17) provided that s. 110.6(2.1) would be“ applicable to the 1988 and subsequent taxation years”. The relevant portions of the legislation read:

(6) section 110.6 is further amended by adding thereto, immediately after subsection (2) thereof, the following subsection:

"(2.1) In computing the taxable income for a taxation year of an individual (other than a trust) who was resident in Canada throughout the year and who disposed of a share of a corporation in the year or a preceding taxation year and after June 17, 1987 that, at the time of disposition, was a qualified small business corporation share of the individual, there may be deducted such amount as he may claim not exceeding the least of

(a) the amount, if any, by which $375,000 exceeds the total of

(i) the aggregate of all amounts each of which is an amount deducted by the individual under this section in computing his taxable income for a preceding taxation year,

(ii) where the taxation year ended after 1987, the amount determined under subparagraph 2(a) (ii) in respect of the individual for the year,

and

(iii) where the taxation year ended after 1989, the amount determined under subparagraph (2)(a)(iii) in respect of the individual for the year;

(b) the amount if any, by which his cumulative gains limit at the end of the year exceeds the amount deducted under subsection (2) in computing his taxable income for the year;

(c) the amount, if any, by which his annual gains limit for the year exceeds the amount deducted under subsection (2) in computing his taxable income for the year; and

(d) the amount that would be determined in respect of the individual for the year under subparagraph 3(b) (other than an amount included in determining the amount in respect of the individual under paragraph (2)(d)) in respect of capital gains and capital losses if the only properties referred to in that paragraph were qualified small business corporation shares disposed of by him after June 17, 1987.”

(17) Subsections (1) to (10), (12), (13), (15) and (16) are applicable to the 1988 and subsequent taxation years . . . .

(d) Harold Ast disposed of various capital properties during the 1989 taxation year before he died on October 15, 1989. In the terminal return of Harold Ast, which was prepared by his accountant, the taxable capital gain of Harold Ast was shown as $105,590 calculated as follows: $206,300 (proceeds of disposition) — $63,500 (adjusted cost base) = $142,800 (capital gain) x 2/3 = $105,590.

(e) Since the Class "A" shares sold by Harold Ast to his son, Dean Ast, on September 3, 1987 (after June 17, 1987) satisfied the definition of Qualified Small Business Corporation Shares under s. 110.6(1) of the Act, the accountant who prepared the terminal return for Harold Ast claimed a Capital Gain Deduction From Other Property pursuant to s. 110.6(3) of the Act in the amount of $66,582.11. The tax calculated as owing by Harold Ast to Revenue Canada in the taxation year ending October 15, 1989, which sum was forwarded to Revenue Canada, was $17,242.35.

(f) Revenue Canada reassessed the Estate of Harold Ast in respect of the terminal return of Harold Ast by reducing the Capital Gain Deduction From Other Property claimed in the return from $66,582.11 to $1. Revenue Canada therefore claimed that the Estate of Harold Ast owed Revenue Canada an additional $32,327.46 in tax in respect of the terminal return of Harold Ast. The reason for denying the deduction was stated by Revenue Canada in a letter dated September 5, 1990 to be that the Class "A" shares soles [sic] on September 13, 1987 did not meet the definition of Qualified Small Business Corporation Shares set out in subsection 110.6(1) of the Act.

With respect to subclause 1(e) of the law brief, counsel for the respondent concedes that the subject shares of Hill Avenue Drugs Ltd. satisfied the definition of" "Qualified Small Business Corporation Shares” under subsection 110.6(1) and that this definition was made specifically applicable to the disposition of shares after June 17, 1987 by the amending legislation (see paragraph 18(17)(b) of S.C. 1988, c. 55). However counsel does take issue with the last sentence of subclause 1(f) of the law brief for the reason that the evidence is deficient in this respect. Rather, he submits, the actual and probative evidence is that both Dean Ast and Mr. Dillon were at all material times aware of the fiscal difficulties occasioned by what is colloquially known as the "notch" period June 17, 1987 to December 31, 1987 as it pertains to the applicability of subsection 110.6(2.1) of the Act thereto.

I propose to deal with this latter situation first. Apparently the sole written communication respecting the reasons for the disallowance emanated from the Winnipeg Taxation Centre. It appears on Revenue Canada’s form RT10 (tab E of the Book of Documents), it is dated September 5, 1990 and it purports to be a response to a submission made by or on behalf of the appellant. The identity of the actual inquirer and the informational submissions actually advanced, ostensibly by telephone, were not known to either Dean Ast or Mr. Dillon. The pertinent extracts from the written response, directed to“ The Estate of the Late Harold Ast", read:

This acknowledges the additional information you submitted concerning the above return. Any change made to this return as a result of this information will be reflected on the Notice of Assessment/Reassessment except your request for increase in capital gain deduction will not be included because:

[there follows certain box check-offs not applicable here but the words following the box that was checked-off read]

it is not allowable for reasons explained below: Only certain shares issued after June 13, 1988 may be qualified small business corporation shares.

I accept respondent-counsel's submissions on this aspect of the case over those of the appellant's position that this appeal should succeed simply on the grounds that the reasons for the disallowance have been shown to be wrong and that the respondent has not met the onus of establishing the correctness of the assessment under appeal. My reasons for preferring the respondent's position are evidentially based in that the verbal submissions made which elicited the written response are unknown, that shortly thereafter everyone concerned became aware the real problem concerned the fiscal implications respecting the notch period and that thereafter the matter had been pursued on this ground only. Accordingly it is my view that this aspect of the appellant's position fails.

The matter of the interpretation of subsection 110.6(2.1) of the Act remains at the core of this appeal. This is the provision which allows the deduction. It appears in the enabling amendment, S.C. 1988, c. 55 assented to on September 13, 1988 which, by subsection 81(17) thereof, made it” applicable to the 1988 and subsequent taxation years”.

Counsel for the respondent submits that subsection 110.6(2.1) operates only for the 1988 and subsequent taxation years as stated, and that the reason a 1987 notch period was created by the appearance of the June 17, 1987 date was simply for transitional purposes to ensure appropriate reserve carry-forwards for those share dispositions occurring during that period. Therefore, he says, the appellant is not entitled to the enhanced exemption.

Counsel for the appellant submits that the way the shares are paid for ought not to be determinative in that the subject provision is not clearly and unambiguously expressed in this manner, nor is there any obvious or common sense reason to treat share disposition on a cash versus time-payment basis differently with respect to eligibility for the deduction in issue. The overarch- ing submission advanced was that the matter involves statutory ambiguities and that where a taxing statute is not explicit, any reasonable uncertainty or factual ambiguity arising from lack of explicitness in the statute ought to be resolved in favour of the taxpayer. For this proposition the authorities cited are Mattabi Mines Ltd. v. M.N.R. (Ontario), [1988] 2 S.C.R. 175, [1988] 2 C.T.C. 294, at pages 192-93 (C.T.C. 306), and Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373, at page 67 (C.T.C. 126, D.T.C. 5384).

Counsel's specific submissions, as I understood them, were in two parts. Part B was advanced as an alternative to Part A.

Part A concerns the assertion that the qualified small business corporation shares capital gains deduction was properly claimed in the 1989 taxation year. In this respect it was urged that nothing in the legislation precludes the gain in respect of the disposition of a qualified corporate share from being claimed in subsequent taxation years. Subsection 110.6(6) of the Act compelled Harold Ast to report the gain arising from the disposition of these shares in his 1987 return which does not in itself operate to preclude the taking of an advantage offered by legislation subsequently enacted that is referable to those transactions and which expressly allows an additional deduction in respect of those subsequent taxation years.

Part B, expressed in the alternative, concerns the claim for capital gains deduction pursuant to 110.6(2.1) being properly made for the 1987 taxation year and adjusted for the 1989 taxation year. In this respect it was said that the amending provision provides that 110.6(2.1) “is applicable to the 1988 and subsequent taxation years". What is notable is the silence concerning previous taxation years. Given the uncertainty which arises, the answer is to be sought in the words employed within the new provision itself. The operative and determinative words in 110.6(2.1) provide that “in computing taxable income for a taxation year of an individual . . . who disposed of a share of a corporation in the year or a preceding taxation year and after June 17, 1987 . . . there may be deducted such amount. . .” (which is the least of four amounts set out therein). Therefore a transaction after June 17, 1987 gives rise to the ability of the individual to claim the deduction as the provision itself expressly, or by necessary implication, gives rise to the right of the individual to claim the deduction. Accordingly any ambiguity arising out of the amending provision S.C. 1988, c. 55, subsection 81(17) is resolved by the words in subsection 110.6(2.1) itself, with any ambiguities therein similarly being interpreted in the appellant's favour.

Analysis

In my view, the interpretative approaches employed by counsel for the appellant are permissible from the language employed, are persuasive, and are to be preferred to those advanced on behalf of the respondent. To find that the whole matter encompasses mere transitional matters triggered by possible reserves arising out of other than cash transactions occurring during the notch period introduces a limitation on the amplitude of subsection 110.6(2.1) which is not supported by clear language in the subsection itself.

Respondent's counsel urged that when one makes the effort to walk through all of what appears to be convoluted language employed in subsection 110.6(2.1) in arriving at the lesser amount to be calculated in accordance with its paragraphs (a) to (d) inclusive, one would or could eventually conclude that the limiting factor was necessarily implied in order to "permit reserves from prior year's dispositions of qualified small business corporation shares to quality for the full $375,000 exemption if the shares were disposed of after June 17, 1987” to use the explanatory words found in Carswell's publication of the Canada Tax Service at page 110-1900L. In my view, however, this approach does not provide any meaningful answers to a notch period transaction which does not encompass matters of reserves. Surely the purported limitation proposed by this interpretative approach could have been more simply or clearly expressed in the legislation itself if that was to be the object and purpose of subsection 110.6(2.1) respecting notch-period transactions.

Given the obliquity of the provision itself, as I see it the application of section 11 of the Interpretation Act enhances the appellants position. It reads:

11. Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

In the result the Court finds that the claim for capital gains deduction from other property pursuant to subsection 110.6(2.1) of the Act in the amount of $66,582.11 in respect of the disposition of the qualified small business corporation shares of the appellant was properly claimed in the 1989 taxation year.

The appeal is to be allowed, with costs to the appellant. I invite counsel for the appellant, pursuant to Rule 169 of the General Procedure Rules of this Court, to prepare a draft of the formal judgment implementing this decision.

Appeal allowed.